IPO drought will continue, market ‘too risky’
Mergers and acquisitions pick up as companies restructure or realign to ease inflationary pressures
M13 co-founder and partner Courtney Reum discusses the weak condition of the IPO market on 'The Claman Countdown.'
Initial public offerings (IPO) fell to their lowest point since the 1990s last year, and one expert says market conditions are still too volatile to launch a new stock in 2023.
Last year, just 1,671 IPOs were launched around the world, down 48% from the 3,260 flotations completed in 2021, according to S&P Global.
The total amount offered in IPOs during 2022 plummeted to just $179.73 billion, after reaching $626.56 billion the year before.
The top 3 IPOs were:
- SkyBridge Multi-Advisor Hedge Fund Portfolios, $1.81 billion
- Corebridge Financial, $1,68 billion
- TPG, $1.1 billion
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Traders work on the floor of the New York Stock Exchange (NYSE). Last year, investors saw the lowest number of IPO launches in since the 1990s. (Reuters/Brendan McDermid / Reuters Photos)
In an interview with FOX Business, Quincy Krosby, chief global strategist for LPL Financial, said "Investment banking has been slow to recover from the volatility and uncertainty caused by the Fed's aggressive rate hike campaign."
As a result, "The IPO market remains dormant as conditions are not yet conducive for risk taking," she continued. "There are also concerns that the economic backdrop could deteriorate further as the cumulative effect of interest rate hikes flow into the broader market."
After declining for much of 2022, IPO activity in the U.S. slowed drastically in the fourth quarter. Just 20 IPOs were launched, raising $3.02 billion. During the same quarter from the year before, 234 IPOs were unveiled to hit $65.44 billion.
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Federal Reserve Board Chair Jerome Powell said the process to cool inflation "is going to take quite a bit of time. It's not going to be smooth. It's going to be bumpy." (AP Photo/Jose Luis Magana / Associated Press)
Krosby said, "Once it's clear that the Fed is finished with its rate hike campaign, and that inflation has receded accordingly, the IPO market should recover as demand recovers."
"Key for the IPO market is that the economic backdrop remains solid once the Fed is finished raising interest rates," she added.
On Tuesday, the Labor Department reported that the consumer price index, a broad measure of everyday goods including gasoline, groceries and rents, rose 6.4% on an annual basis.
Earlier in the month, the Federal Reserve raised its benchmark interest rate by a quarter of a point, further slowing its aggressive campaign to cool the economy, putting the key benchmark federal funds rate at a range of 4.5% to 4.75%, notching it’s the highest since 2007.
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The resilience of the labor market has been a major surprise, but as higher rates make borrowing and spending increasingly expensive, employers will likely hire less. (Fox News Digital | istock / iStock)
However, an unexpected jobs report that saw the U.S. economy add 517,000 new positions in January cautioned the Fed’s earlier optimism.
While Fed Chair Jerome Powell declined to say whether interest rates will need to go higher than policymakers estimated late last year, he said the data emphasizes that the "process is going to take quite a bit of time. It's not going to be smooth. It's going to be bumpy."
"When the IPO sector is fully restored, it is typically associated with a ‘risk on’ market that is underpinned by easier financial conditions," Krosby explained.
"For the average consumer who is invested in the market, either via an IRA or 401(k) plan, overall market conditions are typically positive," she said.
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Baiju Bhatt and Vlad Tenev celebrate after ringing the bell on Robinhood Markets IPO Listing Day on July 29, 2021 in New York City., N.Y. (Cindy Ord/Getty Images for Robinhood / Getty Images)
Andrew Kurtz, CEO of Kopis, a technology firm based in the U.S. said, "Companies that aspire to an IPO need to use the current market situation to call ‘time-out’ and examine aspects of their businesses that may curtail growth."
"Companies need to use this downtime to take stock of their departments and ensure it's primed for the IPO phase and beyond," he added.
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Despite the weakened economy, lack of initial public offerings and uncertainty around the Fed’s upcoming rate hike strategies, Krosby said mergers and acquisition activity has picked up as companies focus on their core competencies to increase competitiveness with the higher cost of capital.
"The technology sector is ripe for M&A activity, especially within areas of artificial intelligence, semiconductors, cybersecurity, financial technology, and healthcare technology," she went on. "Health Care is also subject to activity, particularly within the biotech sub-sector."
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"The banking sector might also see a surge in M&A activity, particularly among regional banks," she finished.